HOURLY RATES, INCURRED COSTS AND THE COST BUDGET: AGREED BUDGETS HAVE NO SPECIAL STATUS: HOURLY RATES NOT A GOOD REASON TO DEPART FROM THE BUDGET

The judgment of Master Nagalingam in Nash v Ministry of Defence [2018] EWHC B4 (Costs) covers several issues relating to costs budgets. The Master found that a reduction in hourly rates in relation to incurred costs did not lead to any reduction of the sums allowed on the costs budget. The hourly rates were only one of many factors. The Master also held that there was no special status to an “agreed” budget. An agreed budget was not subject to any special scrutiny on assessment because it had not been subject to judicial determination at the budgeting stage.

“I find that a reduction in hourly rates of the incurred costs is not a good reason to depart from the budget in respect of the budgeted (future) costs.”

THE CASE

The court was assessing costs in a case that had been subject to costs budgeting. The hourly rates for past costs had been reduced on assessment. The court was, thereafter, considering those figures that had been budgeted.

THE PHASES

The Master described the claimant’s position.

Prior to the commencement of the detailed assessment hearing, the Claimant had sought an upward departure from the budget in a number of phases. However, over the course of the hearing the Claimant withdrew such arguments, having acknowledged they could establish no good reason to depart from the budget upwards in the phases they sought to.

In the remaining phases, the Claimant sought less in their bill of costs than was allowed for by the costs management order. It is generally accepted that where the Claimant had spent less than the costs management order allowed for in any particular phase, that was a good reason to depart from the budget downwards.

As such, the Claimant was left in a position where they were either seeking less than the budgeted costs in each phase, or accepting they could not recover more than the budgeted costs in each phase even where they had spent more in that phase

Mr Joseph advances the argument today that where I have reduced the hourly rates in relation to the incurred costs, that is a good reason to apply the same reduced rates to the ‘budgeted’, i.e. future costs. The proposed mechanism that he invites me to adopt is to review the estimated hours in the Claimant’s agreed budget, and apply the assessed hourly rate to those estimated hours to retrospectively arrive at a revised reduced budgeted (i.e. future) costs figure for each phase, and thereafter allow the recalculated amount, save for where fewer hours are claimed in the bill of costs than those claimed in the estimated part of the budget in the corresponding phase.

In support of his position, Mr Joseph relies on the fact that the Claimant’s budget was agreed. He argues, therefore, that the budget for future costs has never been assessed or been subject to the scrutiny he says would have been required had the budget for future costs not been agreed, which would have instead then required submissions before the case managing Judge. He says the case managing Judge merely recorded the parties had agreed the budget and accordingly that does not hold the same status as a costs management order where budgets had not first been agreed.

WAS THE BUDGET AGREED?

The Master had to consider whether the budget was “agreed and the status of that budget.

Putting aside the question of whether the parties may even agree to a term that budgeted costs may be agreed subject to a future determination as to hourly rates, the uncertainty as to what the terms of the agreement were between the parties serves to highlight the high degree of responsibility that is burdened upon parties where they seek to agree budgets.

Whether one considers the 2016 version or the current version of CPR 3.15(2)(a), there existed and remained a requirement for the court to record the extent to which the budgets (2016) / budgeted costs (2017) are agreed between the parties.

The reason that requirement exists is found in CPR 3.18(a) which provides that in any case where a costs management order has been made, when assessing costs on the standard basis, the court will have regard to the receiving party’s last approved or agreed budget (2016) budgeted costs (2017) for each phase of the proceedings.

If there is any uncertainty as to the terms under which a budget / budgeted costs were agreed, such that the extent of the agreement is then subject to debate, then it places the assessing court in some difficulty when directed to have regard to an agreement which is not unambiguous in its terms.

I do not feel troubled by the uncertainty as to the terms of agreement in this case because regardless of what was agreed, CPR 3.18(b) permits me to reduce the budgeted (future) elements of costs claimed if there is good reason to do so.

In this respect, because the paying party additionally seeks to advance an argument that a reduction in rates applied to the incurred costs is a ‘good reason’ to reduce the budgeted costs, I am not prevented from considering if there is a good reason even where I have found that there is no evidence the parties agreed that the rates in the budgeted costs section of the budget could be subject to detailed assessment.

I simply take the opportunity to highlight to both parties in this assessment the importance of agreeing budgets in clear and unambiguous terms, and ensuring that case managing courts are fully informed of the terms of any agreement so that the extent of agreement may be correctly recorded in the costs management order.

THE STATUS OF AN AGREED BUDGET

The Master than had to consider whether an agreed budget had a different status to a budget done after a hearing. That argument was roundly rejected.

A significant element of Mr Joseph’s argument focuses on the fact that the costs management order in the index case arises out of circumstances where the Claimant’s budget was agreed. However, Mr Joseph’s argument thereafter appears to rely on the court’s approval of an agreed budget holding a lower status than approval following a challenged budget, on what appears to be a presumption that the case managing judge will not have addressed their mind as to the constituent elements and underlying details of the budget when making the costs management order.

Such a presumption would require me to accept that there exists a mindset amongst case managing judges to simply approve any agreed budget without any reference to the constituent elements and underlying detail in the budget for each phase. That is not a presumption I accept. The very purpose of filing a budget is to assist the court in thereafter fixing a budget. The court cannot fix a budget without having regard to the underlying detail or constituent elements in the filed budget regardless of whether a costs management order is made following the hearing of arguments or following advice that the budgets are agreed. In either instance, the case managing court retains a responsibility to consider whether the budgeted costs fall within the range of reasonable and proportionate costs.

The costs management order in this matter was made under the direction of CPR 3.15 as it was at the time:

3.15 – (1) In addition to exercising its other powers, the court may manage the costs to be incurred by any party in any proceedings.

(2) The court may at any time make a “costs management order”. Where costs budgets have been filed and exchanged the court will make a costs management order unless it is satisfied that the litigation can be conducted justly and at proportionate cost in accordance with the overriding objective without such an order being made. By a costs management order the court will-

(a) record the extent to which the budgets are agreed between the parties;

(b) in respect of budgets or parts of budgets which are not agreed, record the court’s approval after making appropriate revisions.

(3) If a costs management order has been made, the court will thereafter control the parties’ budgets in respect of the recoverable costs.

Whilst I accept the definition of ‘budgeted’ to mean ‘to be incurred’ was not clarified in legislation until after the costs management order in this case was made I have no difficulty in concluding that when the parties agreed budgets, they were agreeing to fix a budget for future costs whilst accepting that incurred costs could be the subject of detailed assessment.

I am against Mr Joseph as to the status of a costs management order where the same has arisen from agreement as opposed to only being made after a partially or fully contested CCMC.

Given the wording of CPR 3.18 (2016 or 2017 versions) I find that a costs management order holds the same status regardless of whether that order came about as a result of a budget being agreed in full, or whether it was approved following revisions by the case managing court where there had been no or only partial agreement prior to the first CMC. The rules draw no distinction at all in that respect.

Whilst, for the reasons I have outlined above, I have concluded there is no difference between the status of a costs management order which arises out of agreement rather than revisions following dispute, I do acknowledge that Costs Practice Direction 3E 7.3 provides specific guidance as to what the case managing judge should do where budgets are not agreed without specifically dealing with what approach to adopt where budgets are agreed.

However, a court is not prevented from withholding its approval of a costs budget even where a budget is agreed by the parties. Further, the making of a costs management order must follow the exercise of the court’s discretion under CPR 3.15(2), namely that the court will make a costs management order (where costs budgets have been filed and served) unless it is satisfied that the litigation can be conducted justly and at proportionate cost in accordance with the overriding objective without such an order being made.

It follows that for the court to make a costs management order, the court must first conclude that the litigation could not be conducted justly and at proportionate cost in accordance with the overriding objective absent such an order.

Accordingly, a costs management order may only arise in circumstances where the approved budgeted (future) costs are deemed to be proportionate by the case managing judge.

I therefore have no difficulty in concluding that a case management order must be treated in the same way on assessment regardless of whether the origins of the order arise from an agreement or otherwise.

I also observe that if I am wrong about that it would mean an uncertainty has been built into the rules with regards to costs management orders arising out of agreed budgets. That would be a wholly unsatisfactory outcome given the implications, including a disincentive to agree budgets for fear of uncertain outcomes on assessment and a greater burden on the courts to then intervene.

WAS THERE GOOD REASON TO DEPART FROM THE BUDGET?

The defendant argued that the reduction in hourly rates for incurred costs meant that there was a good reason to depart from the budgeted costs.

The approach the paying party invites me to take in my view gives rise to a risk of double jeopardy, which would erode elements of the certainty which the costs budgeting regime was designed to introduce.

In this respect, I remind myself of the relationship between the incurred costs and the budgeted costs when a costs management order is made.

Costs Practice Direction 3EPD.4, paragraph 7.4 states as follows:

As part of the costs management process the court may not approve costs incurred before the date of any budget. The court may, however, record its comments on those costs and will take those costs into account when considering the reasonableness and proportionality of all subsequent costs(2016).

As part of the costs management process the court may not approve costs incurred before the date of any costs management hearing. The court may, however, record its comments on those costs and will take those costs into account when considering the reasonableness and proportionality of all subsequent budgeted costs (2017).

The effect of the practice direction (and I recall it is the 2016 version which was in force at the time the costs management order was made in this case) is to provide the case managing judge with a discretion to record comments on the costs management order relating to incurred costs, but provides a mandatory requirement for the case managing judge to take into account the incurred costs before making a costs management order of what amounts are reasonable and proportionate in terms of the subsequent costs.

The case managing judge is aware that the incurred costs are subject to detailed assessment and therefore approves a budget for subsequent costs in the full knowledge that the incurred costs may be reduced on detailed assessment. However, notwithstanding that jeopardy to the eventual receiving party, the amount allowed for subsequent costs follows a mandatory requirement for the case managing judge to take into account incurred costs – a practice which often leads to the budget for subsequent costs being reduced. It follows that whatever amount is allowed for subsequent costs by the case managing judge must, by operation of Costs Practice Direction 3E 7.4, be deemed to be reasonable and proportionate.

As such, if when claimed in a bill of costs those subsequent costs are reduced to a level below that permitted by the costs management order without good reason, it creates a double jeopardy which could only be avoided by having a full detailed assessment of the incurred costs at the budgeting stage – an exercise which would be wholly unsatisfactory and in many cases impractical to the prosecution of the case.

This in my view is a factor which contributes to setting a high bar with respect to what constitutes a good reason.

“Where there is a proposed departure from budget – be it upwards or downwards – the court on a detailed assessment is empowered to sanction such a departure if it is satisfied that there is good reason for doing so. That of course is a significant fetter on the court having an unrestricted discretion: it is deliberately designed to be so. Costs judges should therefore be expected not to adopt a lax or over-indulgent approach to the need to find “good reason”: if only because to do so would tend to subvert one of the principal purposes of costs budgeting and thence the overriding objective.”

Where a costs management order has been made, the court will thereafter control the parties’ budgets in respect of recoverable costs (CPR 3.15(3)). Part of that process relates to the ability of the parties to seek upward or downward revisions to their budgets during the lifetime of the claim if there are significant developments in the case (Costs Practice Direction 3EPD.4 paragraph 7.6).

Guidance as to how a budget is approved can be found in Costs Practice Direction 3EPD.4 paragraph 7.3 which specifically provides that:

The court’s approval will relate only to the total figures for budgeted costs of each phase of the proceedings, although in the course of its review the court may have regard to the constituent elements of each total figure. When reviewing budgeted costs, the court will not undertake a detailed assessment in advance, but rather will consider whether the budgeted costs fall within the range of reasonable and proportionate costs.

As such, and given a costs management order is only ever made where required to further the overriding objective in terms of providing for costs which are just and proportionate, I have no difficulty in concluding that the budgeted phase totals which are subject to a costs management order must have been deemed reasonable and proportionate at the time the order was made. I also note that at no stage did either party seek any revisions to the budgets in this case, and indeed no arguments have been advanced as to any significant developments post the costs management order which might otherwise have led to any budget revisions.

In effect, Mr Joseph invites me to go behind or second guess how the constituent elements were balanced in order for the court to make a costs management order. Additionally, and absent there having been any significant developments in the case, he asks me to make a decision which would reduce what the case managing judge has already ordered was a reasonable and proportionate sum to spend for future costs in every phase of the budget.

At the time the costs management order was made in this case, Costs Practice Direction 3EPD.4 paragraph 7.10 provided that:

The making of a costs management order under rule 3.15 concerns the totals allowed for each phase of the budget. It is not the role of the court in the costs management hearing to fix or approve the hourly rates claimed in the budget. The underlying detail in the budget for each phase used by the party to calculate the totals claimed is provided for reference purposes only to assist the court in fixing a budget.

Thus between Costs Practice Directions 3EPD.4 paragraphs 7.3 and 7.10 there is reference to “constituent elements” and “underlying detail” as guiding factors a case managing judge may take into account in arriving at a proportionate figure for the budgeted costs of each phase in a costs management order.

Now, with no change in circumstances advised of or argued, I am being asked to effectively override and reduce the sums permitted by the costs management order, sums that the case managing judge had already approved as being reasonable and proportionate.

In order to achieve this reduction, the paying party is effectively asking me to assign an elevated status to hourly rates over and above all of the other constituent elements / underlying details in the budget. However, rates are just one of many constituent elements / underlying details which contribute to each of the budgeted phase totals. Rates otherwise hold no special status in the composition of a budget. If I am wrong about that, it gives rise to an additional risk that if rates (as one constituent element / underlying detail) is opened up to assessment then all of the constituent elements / underlying details could be opened up to assessment. This would be defeating one of the key purposes of costs budgeting, i.e. increased certainty and reduced costs of dealing with future assessments of costs. It would also significantly reduce the scope for budgets to be agreed, with parties then arguing over what constituent elements / underlying details of an ‘agreed’ budget could then still be subject to further scrutiny upon a detailed assessment of costs.

A costs management order is only made in circumstances where the court finds that such an order is required to ensure the litigation can be conducted justly and at proportionate expense in accordance with the overriding objective. A costs management order has been made in this case, and no revisions were ever sought in respect of the same. No significant developments took place which would have warranted a revision to the budgets. The costs management order was made to allow a budget for future costs in each phase, taking into account various underlying details and the constituent elements of the claimed budget. The costs management order reflects the allowance of budgeted phase totals, with rates being nothing more than an underlying detail.

Thus save for where hourly rates hold some special status in the setting of a budget and subsequent making of a costs management order, there is no good reason to depart from the budget for the budgeted (future) costs.

I find that hourly rates hold no special status in the making of a costs management order.

A proportionate total for each phase of budgeted (future) costs is set based on taking into account a variety of factors, including the incurred costs. A party therefore proceeds with certainty as to what is a proportionate future sum to spend per phase. That certainty is entirely eroded if hourly rates are then given a form of special status which requires rates to be assessed in the estimated phases of a bill of costs.

CPR 3.15(3) provides that:

If a costs management order has been made, the court will thereafter control the parties’ budgets.

That control is on the amount of money the parties spend, not how they spend it.

By way of example, if a party budgets for 10 hours at £500/hr plus £2,000 on Counsel for future costs in the disclosure phase, the total of £7,000 is exactly the same as if the same party had budgeted for 100 hours at £50/hr plus £2,000 on Counsel. If £7,000 is approved for the budgeted (future) costs total then the court will not interfere with how that money is spent without good reason.

A budget approved in these terms does not, for example, compel that party to spend £2,000 on Counsel for future costs relating to disclosure or use the fee earners anticipated when the budget was drawn. Similarly, it does not limit that party to spend £2,000 on Counsel for future costs relating to disclosure.

The budget is set following the making of a costs management order, and Solicitors must thereafter cut their cloth accordingly.

Taking the example above, where a rate of £500/hr is reduced to £100/hr in the incurred costs, it cannot be logical for a budget claiming 10 hours at £500/hr plus £2,000 for Counsel (total £7,000) to be reduced to £3,000 on assessment but where a budget claiming 100 hours at £50/hour plus £2,000 for Counsel (total £7,000) would suffer no reduction at all (where say £7,000 is claimed in that phase in the bill of costs).

PROPORTIONALITY AND THE OVERRIDING OBJECTIVE

Proportionality

I remind myself that earlier in this judgment I referenced the fact that within the body of CPR 3.18 is the words “Attention is drawn to rules 44.3(2)(a) and 44.3(5), which concern proportionality of costs.” That was the case as at 2016 (when the costs management order in this case was made) and as of now.

One cannot ignore the presence of those words within the rule. Indeed, the notes at 3.18.1 in the White Book 2017 are of assistance, which state:

The specific reference to r.44.3(2)(a) in the parenthesis at the end of r.3.18 should be noted. Whilst those costs that were incurred at the time of the budget cannot form part of the budget and so fall for assessment unfettered by the restraints of the budget, once assessed, on the basis of whether they were reasonably incurred and reasonable in amount, and added to the budgeted costs the total figure is still subject to an overall assessment of proportionality.

CPR 44.3(2)(a) provides that:

Where the amount of costs is to be assessed on the standard basis, the court will only allow costs which are proportionate to the matters in issue. Costs which are disproportionate in amount may be disallowed or reduced, even if they were reasonably and necessarily incurred.

The reason this provision exists, and is specifically referred to within CPR 3.18, is in recognition that the facts and circumstances in which a costs management order was made may have subsequently changed without revisions being made to the budget.

Where, for example, a change in facts and circumstances led to simplification of matters and settlement before there was an opportunity to revise the budgets, a scenario could arise where the assessed incurred costs, when added to the budgeted costs under a costs management order (as departed from where less than the budgeted amount is claimed), is disproportionate.

In such circumstances, CPR 44.3(2)(a) acts as an effective safety valve for paying parties to seek a further reduction. This valve can be released without a requirement to go into the detail of the constituent elements of the bill – such as the rates within the budgeted costs, but rather with reference to the further specifically referred to factors in CPR 44.3(5).

Accordingly, even where – as I have concluded – a reduction to hourly rates in the incurred costs, is not a good reason to depart from the budgeted costs, a paying party still retains the ability to argue that the overall sum of assessed incurred costs plus budgeted costs is disproportionate such that the overall sum should be reduced.

Overriding objective

Finally I refer to CPR 1.1 and CPR 1.2(b). The approach I am invited to adopt by Mr Joseph would, I find, lead to a number of consequences which would be entirely at odds with the overriding objective.

It would not be just, in my view, to expose receiving parties to the double jeopardy I have referred to above.

There would certainly be no saving of expense, and indeed there would be additional and disproportionate expense both at the budgeting stage and at detailed assessment.

That would impede the expeditious and fair handling of cases, whilst also requiring a disproportionately high share of the court’s resources.

For all of the reasons above, I find that a reduction in hourly rates of the incurred costs is not a good reason to depart from the budget in respect of the budgeted (future) costs.